Penturelli v. Spector Cohen Gadon & Rosen PC
| Decision Date | 14 February 1985 |
| Docket Number | Civ. A. No. 84-6124. |
| Citation | 603 F. Supp. 262 |
| Parties | Bernardo J. PENTURELLI v. SPECTOR COHEN GADON & ROSEN P.C., et al. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
Henry H. Janssen, Philadelphia, Pa., for plaintiff.
Patrick T. Ryan and Peggy L. Snodgrass, Philadelphia, Pa., for Ely & French.
Allan Windt, Philadelphia, Pa., for Spector, et al.
Plaintiff Bernardo J. Penturelli filed this action on December 13, 1984, alleging that defendants defrauded him on December 15, 1978, when he subscribed for and purchased 28 fractional undivided working interests in the Addison Development, a program whereby a limited number of persons would sublease certain rights to mine and remove all mineable and merchantable coal from specific seams of coal situated within Addison Township, Somerset County, Pennsylvania. Plaintiff Penturelli seeks recovery from twenty-five defendants who played various roles in the Addison Development project under the Securities Act of 1933, 15 U.S.C. § 77a et seq., ("the `33 Act"), the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., ("the `34 Act"), the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. ("RICO"), and state common law.
Presently pending are eight motions to dismiss. Defendants have asserted a number of grounds for dismissal including lack of subject matter jurisdiction and failure to state a claim upon which relief can be granted. I will review each basis for dismissal in seriatim.
In deciding a motion to dismiss, I must accept as true all factual allegations made in the complaint and must resolve all reasonable inferences to be drawn from those allegations in the light most favorable to plaintiff. Dismissal is appropriate only when it appears beyond a doubt that plaintiff can prove no set of facts in support of his claims which would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957).
Defendants' first contention is that the statute of limitations had expired before plaintiff filed this action. Plaintiff alleges that he was defrauded in December of 1978. Defendants assert that Pennsylvania "blue sky" statute of limitations as embodied in 70 P.S. § 1-504(a) should govern this action because no federal statute provides an applicable limitations period. Section 504(a) states in pertinent part:
No action shall be maintained to enforce any liability created under section 501 ... unless brought before the expiration of three years after the act or transaction constituting the violation or the expiration of one year after the plaintiff receives actual notice or upon the exercise of reasonable diligence should have known of the facts constituting the violation, whichever shall first expire.
Application of section 504, however, presumes that there is a private cause of action under the Commonwealth's "blue sky" law comparable to that raised by the plaintiff under the federal securities acts. As defendants all note, 70 P.S. § 1-401 closely parallels the federal section 10(b) under which plaintiff is proceeding in part, but the sole source of civil liability for any act in violation of section 401 is found in section 501, which provides in pertinent part:
Although these sections give a cause of action to defrauded sellers and buyers, they only give the seller or buyer the right to sue the person purchasing or selling the security. In other words, the Pennsylvania securities statute grants a private remedy to a buyer only against his seller. When there is no private remedy under the state securities statute, but there is a common law fraud action, the federal court must look to the Commonwealth's statute of limitations for common law fraud.
Applying exactly this type of analysis, the Third Circuit, in Biggans v. Bache Halsey Stuart Shields, Inc., 638 F.2d 605, 610 (3d Cir.1980), held that the Commonwealth's six year statute of limitations for common law fraud applied to a § 10b action against a brokerage house which handled securities transactions for the plaintiff. Similarly, in Sharp v. Coopers & Lybrand, 649 F.2d 175 (3d Cir.1981), the court held that the common law fraud statute of limitations of six years governed a suit for securities fraud brought by a purchaser of a limited partnership in an oil-and gas-drilling venture against an accounting firm which prepared an opinion letter outlining the tax treatment of investors.
The key question here is which of the defendants, if any, were sellers of the alleged securities involved. Such a determination probably involves a factual determination which is not appropriately made on a motion to dismiss. Furthermore, I am not sure, as defendants contend, that a mere allegation of privity by plaintiff between himself and each defendant is enough to make each defendant a seller for purposes of the securities acts. See Lewis v. Walston & Co., 487 F.2d 617 (5th Cir.1973) (); Hill York Corporation v. American International Franchises, 448 F.2d 680 (5th Cir.1971) (). Because there is another ground upon which I must dismiss plaintiff's claim under the Federal Securities Acts, it is unnecessary for me to resolve the issue of the statute of limitations at this time.
Defendants also contend that plaintiff fails to state a cause of action under the Federal Securities Acts because this action does not involve the sale or purchase of a security. The crux of defendants' position is that plaintiff, as an investor in the Addison Development, retained too much managerial control and responsibility to be treated as a passive investor entitled to protection under the Federal Securities Acts.
In response, plaintiff stated that his interest in the Addison Development was a fractional undivided working interest in a coal mine which by definition is a security.1 Although the definitional section of the federal securities acts does imply that a fractional undivided working interest in mineral rights is a security, employment of the phrase "fractional undivided working interest" alone is not enough to establish that the interest is a security. In United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975) the Supreme Court rejected a literal approach to determining whether an interest is a security:
We reject at the outset any suggestion that the present transaction, evidenced by the sale of shares called "stock," must be considered a security transaction simply because the statutory definition of a security includes the words "any ... stock."
Instead, the Court stated, a court must look to the economic reality of the interest to determine "`whether the scheme involved an investment of money in a common enterprise with profits to come solely from the efforts of others'". Id. at 852, 95 S.Ct. at 2060 (quoting SEC v. W.J. Howey Co., 328 U.S. 293, 301, 66 S.Ct. 1100, 1104, 90 L.Ed. 1244 (1946)).2
In SEC v. Howey, 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946) the Court held that the offering of units of a citrus grove development coupled with a contract for cultivating, marketing and remitting the net proceeds to the investor was an offering of an investment contract within the meaning of the '34 Act. In so holding, the Court set forth the test to be applied, the key element of which is, for this case, whether the profits were to come solely from the efforts of others. Contending that the profits to be derived from the Addison Development depended upon the efforts of the promoters and developers, plaintiff correctly notes that the Third Circuit has refused to read the word "solely" literally. When applying the Howey test in Lino v. City Investing Co., 487 F.2d 689, 692 (3d Cir.1973), the court held that an investment contract "can exist where the investor is required to perform some duties, as long as they are nominal or limited" and would have "little direct effect upon receipt by the participant of the benefits promised by the promoters." The court therefore rejected the literal approach. But, as the Lino court expressly noted, an investor's duties and responsibilities must be nominal or limited. Because the investors in Lino were required to make significant efforts to ensure the success of the project, the plaintiff's interest was not a security.
Similarly, in Goodwin v. Elkins & Co., 730 F.2d 99 (3d Cir.1984), the court held that a federal securities claim was properly dismissed when plaintiff's claim was based on the contention that his interest in a brokerage firm partnership was a security. Writing separately, the three judges of the panel agreed that the plaintiff's interest was not a security despite plaintiff's contentions that he was, in reality, vested with so little power and responsibility that the managing partner and management committee had effective control. The court focused instead on plaintiff's legal status as a partner both under the Pennsylvania Partnership Act and the Partnership Agreement for Elkins &...
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Penturelli v. Spector, Cohen, Gadon & Rosen, Attorneys at Law, 2
...under either RICO or the securities laws and declined to exercise jurisdiction over the pendent claims. Penturelli v. Spector, Cohen, Gadon & Rosen, P.C., 603 F.Supp. 262 (E.D.Pa.1985). The basis for the court's dismissal of the RICO count was the absence of any allegations of "an injury di......
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Penturelli v. Spector Cohen Gadon & Rosen
...and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. ("RICO"), and state common law. By memorandum and order dated February 14, 1985, 603 F.Supp. 262, I granted defendants' motions to dismiss on the grounds that there was no security giving rise to a claim under the `33 or `34 Acts and p......
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